One thing you realise when you finally manage to get something published is that there's a huge wealth of material out there about how to write, how to find an agent, etc., and very little about what to do after you get published!
For example, I found it very hard to find much information about my tax situation - and let's face it, it's not like the Inland Revenue takes "I'm sorry, I didn't know" as a reasonable excuse for tax evasion. So here's a hopefully helpful guide to your tax liability as an author. It's just a guide based on my own personal experience, and my number 1 tip is to get an accountant, as I'm no expert and wouldn't want anyone relying on this as a definitive "this will cover all bases" instruction manual.
Firstly, basic income tax. You'll probably already have a job, and probably will want to hang onto it (hardly anyone makes a living out of writing, published or not). This will probably mean that you're already paying tax at 22%. The current point at which you start paying tax at the 40% rate is £34,600. So say your regular job pays you £25,000, and you're earning £100,000 (let's go crazy) from your book deal.
For starters, discount the 10% or whatever fee your agent is taking - this is tax deductible. So after fees, you've got £90K. There's £9,600 left in your 22% tax band (i.e. £34,600 minus £25,000). That equals £2,112 tax.
So once you've deducted the £9,600 that you pay at the lower tax rate from your £90,000, you're left with £80,400. This gets paid at the 40% tax rate, which equals tax of £32,160.
Your taxable total is therefore £34,272. Now, my accountant tells me that not only do you need to pay for this tax year, you also have to prepay 50% of your tax liability towards next year's tax bill. So don't just put aside £34,272 - err on the side of caution and put aside £51,408. If you don't make any money in the next tax year, you can always claim it back. (Note: authors can also benefit from averaging their income over two years, which means that if you earn a smaller amount than we're using in this example that you might be able to get all your book deal money taxed at 22% instead of just some of it; it may also have benefits in terms of this "paying half in advance" lark, in that you wouldn't be having to put aside so much money).
Income tax total = £51,408
National Insurance Contributions
So now we move onto self-employment. The minute you discover you're getting published, you're effectively self-employed and need to register as such. You can do this online - there's a useful guide to the process on the Business Link website. As a self-employed person, you will need to pay both Class 2 and Class 4 National Insurance contributions. Class 2 contributions are currently £2.20 a week, which you will generally pay monthly by direct debit. (£2.20 x 52 weeks = £114.40).
Class 4 contributions are currently charged at 8% of profits between £5,225 and £34,840. If you're also employed, then you're probably already paying Class 1 contributions, and these count towards this upper limit of £34,840. In our example, you're earning a work salary of £25,000, so you will actually only need to pay 8% on the difference between £25,000 and £34,840 (i.e. 8% of £9,840, which is £787.20). (This involves applying for a deferment of Class 4 contributions, i.e. showing that you're already paying a lot via Class 1 contributions). Any profit after that upper limit of £34,840 involves paying Class 4 contributions at a rate of 1% (in our example, this is £90,000 minus £34,840, i.e. £55,160, of which 1% is £551.60).
Total NI contributions = £1,453.20
Total after tax/NI = £35,725, or £52,861 if including tax pre-payment for the following year
Which leaves you, after that lovely £100K has had tax, agent's fees and NI contributions deducted from it, with a slightly less impressive £37,139 that's yours to spend on whatever your little heart desires.
Other things to remember, such as ...
You also need to remember VAT registration, which again you can do online, or via a downloadable form. It basically involves charging publishers your advance plus 8%. You then need to give the 8% to Customs & Excise. The publishers can then claim it back. Crazy, eh? (n.b. even if most of your book advance comes from abroad, you should still register, even though you won't be charging these foreign publishers VAT). The benefit to you of registering for VAT (weighed against the downside of working out how much more to charge your publishers - though if you've got an agent they should be able to help with this), is that you can claim back VAT on various expenses. Which brings us to...
Keep a spreadsheet with details of all the things you buy in the course of your writing career that you think you might be able to claim back for (as well as receipts of course). These expenses can be things like laptops, stationery, travel (to meet with your publisher, your agent, going to book signings, etc.), research (though any trips to the Bahamas to research a setting for your new novel will have to include lots of evidence of you actually doing research - and probably evidence that you were there on your own and not with your love bunny), phone calls (to publishers, etc.), electricity (to heat your office and power up your laptop) and so on. All the expenses should, when all's said and done, be up to 48% cheaper to you than to some who's not paying 40% income tax and VAT.
Fines for late registration
Self-employment registration: You need to register as self-employed within three months of first being told by a publisher that they were going to publish your book.
VAT registration: You'll be fined by HM Revenue & Customs if you don't alert them to the fact you believe your turnover will exceed £64,000 within the next 30 days (or, if your advances from book deals are more gradual, that you've hit a turnover of £64K or over). They count this date from when you first heard what your advance would be.
Business bank accounts
Apparently banks can get shirty if they realise you're using your current account to store your business profits, so it's best to set up an account purely for your profits (and then any writing-related purchases can come out of it, as can NI contributions, etc.) Few banks offer free banking services for business, and those that do seem to only offer this for the first year. Abbey National was one I found that doesn't charge you for its services so long as you stay within certain limits (e.g. only cashing X amount of cheques a month), which should be fine for almost any writer.
Well I hope this helps someone out there. Feel free to post any questions, or correct my maths! (And if anyone can spot an error that will increase my net profit, there's a Creme Egg in it for 'em).